EXCLUSIVE ECB to channel liquidity from north to south in bid to cap spreads – sources

The logo of the European Central Bank (ECB) in Frankfurt, Germany, January 23, 2020. REUTERS/Ralph Orlowski

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  • ECB to reinvest PEPP proceeds where spreads have widened
  • Italy, Spain, Portugal and Greece among the beneficiaries
  • Donors include Germany, France and the Netherlands
  • Lists to review monthly

SINTRA, Portugal, June 30 (Reuters) – The European Central Bank will buy bonds from Italy, Spain, Portugal and Greece with part of the proceeds it receives from maturing German debt , French and Dutch in an effort to limit the discrepancies between their borrowing costs , sources told Reuters.

The ECB will launch this rebalancing on Friday to prevent financial fragmentation between eurozone countries from hampering its plan to hike interest rates – with a further plan due to be unveiled next month. Read more

The central bank has divided the 19 eurozone countries into three groups – donors, recipients and neutrals – based on how big and how fast their bond spreads have risen in recent weeks, according to conversations with a half a dozen people at the annual meeting of the ECB. Forum in Sintra, Portugal. Spreads are measured against German bonds, which serve as the de facto benchmark for the single currency area.

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The ECB will funnel some of the cash from maturing bonds it bought from “donor” countries under its pandemic emergency purchase program to beneficiaries, with neutrals serving as a buffer, it said. indicated the sources.

The lists, which will be revised monthly, reflect the divide between peripheral and core countries that emerged at the time of the first eurozone debt crisis a decade ago.

Beneficiaries include a handful of countries perceived by investors as riskier due to high public debt or slow growth, such as Italy, Greece, Spain and Portugal, the sources said.

Their list was initially longer before the Board of Governors reduced it.

The group of donors is made up of around half a dozen so-called core countries considered safer and includes Germany, France and the Netherlands, the sources said.

An ECB spokesperson declined to comment for this story.

While redemptions in July and August are significant, the ECB knows that simply reinvesting the proceeds will not be enough to calm investors.

It has therefore accelerated work on a new tool that will allow it to make new purchases where they are needed if a country meets certain conditions.

This can be verified by the European Commission, based on its fiscal rules or economic recommendations, or by the ECB itself via a debt sustainability assessment, as it did with Greece a few years ago. a few years old, sources told Reuters. Read more

The first option would keep the ECB above the fray but make it dependent on another institution. The latter would give more leverage to central bankers, but expose them to accusations of getting involved in politics.

The ECB can then drain liquidity from the banking system to offset its bond purchases, most likely through special auctions where banks can obtain more favorable interest rates if they store funds at the central bank. . Read more

Policymakers have yet to decide whether or not to announce the size of the program, as they hope its mere announcement will stabilize markets and they may not have to use it. Read more

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Editing by Tomasz Janowski

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